This is an entirely free service. No payments are to be made. Also send me The Ultimate Guide to Profiting From Derivatives and sign me up for Profit Hunter,a free newsletter that focuses on identifying short term money making opportunities.Download NowSubscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.

Colgate: Lower input costs boosts bottomline

Jul 15, 2010

Colgate-Palmolive (India) Limited has announced its 1QFY11 results. The company has reported a 13.3% YoY and 18.7% YoY gain in sales and net profits respectively. Here is our analysis of the results.

Performance summary

Sales for the company grew by 13.3% YoY during the quarter.

Operating (EBITDA) margins for the quarter grew by 3.8% to stand at 29% on the back of fall in raw material costs. However, higher advertisement spending, increase in staff costs and other expenditure capped operating margin expansion.

Net profit increased by 18.7% YoY during the quarter. This increase has been aided by higher operating income. However, increase in effective tax rate capped net profit growth.

Standalone financial snapshot

(Rs m)

1QFY10

1QFY11

change

Net sales

4,854

5,497

13.3%

Expenditure

3,628

3,898

7.4%

Operating profit (EBDITA)

1,226

1,599

30.5%

EBDITA margin (%)

25.3%

29.1%

Other income

86

54

-37.2%

Interest

5

3

-24.4%

Depreciation

56

79

41.0%

Profit before tax

1,251

1,570

25.5%

Extraordinary item

Tax

223

350

57.2%

Profit after tax/(loss)

1,028

1,220

18.7%

Net profit margin (%)

21.2%

22.2%

No. of shares (m)

136

136

Diluted earnings per share (Rs)*

32.5

Price to earnings ratio (x)*

26.0

* Trailing 12-month earnings

What has driven performance in 1QFY11?

During the quarter, the company witnessed a volume growth of 13% YoY coming on the back of strong sales of 11% YoY in the toothpaste category. The category increased its volume market share to 53.3% from 51.7% during the previous quarter. Contribution from flagship brands like Colgate Dental Cream, Active Salt and Cibaca contributed to the increase in market share. New products like Colgate Sensitive also contributed to market share growth. Toothbrush category also saw strong sales with a volume growth of over 19%, with increase in market share from 38% in 1QFY10 to 41.2% in the current quarter. However, toothpowder continued to lag category growth, losing market share. Market share of toothpowder fell from 49% in 1QFY10 to 48.4% currently. Low penetration level, strong investments into its brands and focus on its core business has continued to benefit Colgate and this is clearly visible from the strong volume growth and increase in market share in toothpaste and toothbrush category.

Cost break-up

As a % of net sales

1QFY10

1QFY11

Cost of material

42.2%

35.8%

Staff costs

8.0%

8.1%

Advertisement

12.0%

12.6%

Other expenditure

12.5%

14.5%

Operating income grew by 31% YoY during the quarter. The main reason was fall in raw material costs as a result of the company's costs saving drive. However, advertisement expense increased as a percentage of sales on brand building activities while staff costs also increased capping operating income growth.

Bottom line grew by 19% YoY during the quarter aided by strong operating income growth. However, growth in net profit was capped on account of higher effective tax rate as the company exhausted some of its tax saving benefits.

What to expect?

At a price of Rs 846, the stock is trading at 25 times our estimated FY13 earnings (RPro subscribers can click here). Colgate's investment in brand building and its costs saving drive is paying off as seen from a strong volume growth and operating income growing faster than sales. We believe that the company with its dominant position in Indian oral care markets is well poised to capture industry growth. However, with new entrants on the horizon, competition is set to intensify and this may affect the company margins going forward. For these reasons we believe that growth from a 2 - 3 year horizon is already priced in the stock.

OTHER USEFUL LINKS

MARKET STATS

ABOUT EQUITYMASTER

Since 1996, Equitymaster has been the source for honest and credible opinions on investing in India. With solid research and in-depth analysis Equitymaster is dedicated towards making its readers- smarter, more confident and richer every day. Here's why hundreds of thousands of readers spread across more than 70 countries Trust Equitymaster.

All rights reserved. Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.